Financial Literacy: How do clients understand their loans? Do clients benefit from business training? Minakshi Ramji Centre for Micro Finance – IFMR CAB-CMF Conference on Microfinance 16 January 2009

Attention on microfinance in India and abroad is focused on –Financial literacy How financially savvy are people? How much do people understand about their loans? –Over-Indebtedness –MFI malpractices Are they charging ‘usurious’ rates of interest? Collection Practices Loan Contract Information Study: –Understand how MFI clients understand their loan contract and –What it means for an MFI client to be informed. This study DOES NOT merely assess whether or not an MFI client knows the terms of his loan –How does a poor person understand his loan and what does that mean for policy? Introduction

 Conducted over two phases  Phase 1: Randomly survey 299 first-time borrowers in 2 different locations, north and south India  Phase 2: Randomly surveyed 40 first time borrowers in 1 location, central India Methodology

What Clients Know  Loan Amount  Duration of the Loan  Weekly Repayment Amount  Joint Liability

What Clients Do Not Know  Interest Rate  As a %  As an Amount  Total Interest over the time of loan Interest in South- Rs. 150 Interest in North- Rs. 180 % in South- 15% % in North - 18%

Client Perspectives on Loan Practices

Client Understanding of Loans  Clients understand  Amounts  Weekly repayment  Default leads to adverse consequences  Clients don’t understand  Interest Rates  Total Payments over the time of the loan

Phase 2: Choosing the Cheaper Loan

Client Understanding of Loans  Regulation must consider the way people understand their loans  Example: Force MFIs to quote flat interest rates and people understand in their loans differently  Example: Evidence on collection practices may indicate that disclosure of MFI rules is required, rather than strict penalties on MFIs which exploit clients  Quantity of Information = Quality of Information?  Bottom-up Regulation rather than top-down regulation  More information on how people understand their loans and the frames in which loans are compared and understood

Impact of a short financial literacy & Business Training Module with SEWA  Do MFI clients benefit from additional business training?  Does training with a friend matter?

Impact of a short financial literacy & Business Training Module with SEWA  Based on two current 5-day SEWA Bank courses  Financial literacy  Business skills training  Streamlined: Reduced 2 SEWA trainings to 4 hours over 2 days  Curriculum design  Interviewed women who had attended SEWA training modules within the last year  Selected the elements of the SEWA trainings they:  Remembered  Found the most useful  Implemented in the short run  Retained in the long run.  Peer training  Half the study participants were invited to bring a friend

Sample Profile  Clients are actively saving or borrowing.  Business owners, piece-rate workers, or self- employed.  Between the ages 18 and 65; average age is 34.  72% literate.

Results  Training with a peer does not show significant impact on the likelihood of attendance  Business training had a strongly significant effect on the likelihood of taking out a new SEWA loan on women who attended training  No significant effect on the likelihood of taking out a new non- SEWA loan  Women who attended the business training were 5.04% more likely to take out a new SEWA loan for the purpose of home repair  Business training did not have a significant effect on the likelihood of taking out a new SEWA loan for business purposes  Business training did not significantly effect the business income or the total individual income of the participants.

Results - Savings  Women who attended business training were 9.9 percent more likely to have a SEWA pension bank scheme.  There was no significant effect of business training on the number of savings accounts held by women who attended the training.  Business training had no significant effect on the frequency of savings deposits.  No effect of business training on the amount of savings deposited either into a formal savings account or through a vishi contribution  Business training had no significant effect on the likelihood of setting aside money each month from individual business earnings for either business or for building a house.  Women who attended business training were 10.3 percent more likely to set aside individual business earnings each month

Results – Overall Confidence  Women who attended the business training were 6.9 percent more likely to report feeling confident in countering problems that arise in their work lives and 8.4 percent more likely to do so if they attended without a peer.  There was no significant effect of business training on overall confidence, although women who attended training without a peer were 7.5 percent more likely to report overall confidence, feeling confident in countering problems that arise in their day- to-day lives.

Thank You